We often hear this statement. It is usual spoken with great conviction and is based on the well known fact that property always goes up – OR DOES IT?
There is no question that property prices in the UK have shown some fantastic increases in recent years especially in the bigger cities. House prices have outstripped inflation by around 3% pa since 1955.
In comparison, the UK stock market has risen by around 6% pa over inflation over the same period according to Numis and the London Business School.
Just to be clear, these figures do not take account of rental income or dividends, nor do they consider the costs of transactions, maintenance or other costs. They are just based on the basic asset prices.
Property Options in retirement
- Buy a big/expensive house and then downsize to something smaller/cheaper to release funds to cover general living expenses.
Whilst logically, this might make sense, we find that for many clients, the idea of leaving the family home, especially at a time when they might want to welcome grandchildren, is unwelcome and stressful. Few people relish the idea of leaving their home and moving away from their friends, community and happy memories.
And what about if they can’t find a buyer – a flourishing property market needs younger people to come in at the bottom end, but with property prices so high, there is no guarantee of this happening.
And if there are no other plans in place, ie no investments, pensions etc, it may be necessary to sell the property urgently to acquire living funds. This could lead to a lower price being obtained for a quick sale and insufficient capital to buy a suitable next home and fund a comfortable retirement.
This is a risky strategy.
- Buy a property (usually with a mortgage) and then rent it out.
Again, on the face of it, this seems a good wheeze. BUT, what happens if mortgage interest rates go up, if tenants leave, if significant repairs are required, or if legislation changes? And what about the ongoing costs – the gas and electricity certificates and the insurance premiums.
The government is introducing new tax rules which may significantly affect the returns. The system is moving from being able to offset mortgage interest in full against rental income for tax purposes, to getting only 20% tax relief on interest payments. This is likely to mean more income tax to be paid.
The average UK rental yield is around 4.3% according to Hargreaves Lansdown – once you have deducted mortgage costs, general expenses, agent’s fees and income tax from this, the income return may be lower than you might get from a good deposit account. So, you will be depending on capital growth for any real return and there you may encounter some of the problems highlighted in point 1 above.
Of course, properties in different parts of the country will generate differing yields which may be higher or lower than the average.
By investing in a diversified portfolio, suitable for your attitude to risk and properly managed and rebalanced, you may achieve returns in excess of property income although this can never be guaranteed. By sheltering your investments in tax efficient vehicles like ISAs and pensions and using capital gains allowances, you can also receive some, or all of these returns tax free.
Things to think about
So does property keep rising in value? No it does not! According to Nationwide, prices fell by 10.7% across the UK in 1990; by 2.3% in 1995 and by a whopping 16.5% in 2009. None of this matters if you don’t want to sell, but if you are hoping to realise your property value to fund your retirement……………….
Everyone needs to live somewhere, so for many people, buying property is something they will do at some point in their lives. We are not saying that property should be avoided, but we strongly advise against putting everything into property and then hoping to realise the benefits at retirement. We recommend a diverse collection of assets which should include, cash, fixed interest holdings, property and shares.
For more information and for assistance with planning for a great retirement, do call us for a friendly chat.